According to oral tradition, when the people of The Royal Bafokeng Nation or “people of the dew” first settled in 1450, the valley in which they did so experienced heavy overnight dew, holding the promise that the land would be fertile and that, in turn, the community would prosper.
Some 160,000 people currently prosper in the Rustenburg valley, which contains one of the largest deposits of platinum group metals in the world. Owing to a novel approach to development, the revenue generated from this scarce mineral resource has been widely and wisely invested, for the benefit of the entire community.
For many years the Bafokeng people have been heavily dependent on these natural assets mined from the land. But at the current rate of extraction, the mineral reserves will run out within the next three to four decades. The Royal Bafokeng Nation (RBN) has realised this and know that they need to reduce their reliance on natural resources and instead develop other avenues of wealth generation.
The Plan to Turn Things Around
In the mid-1990s, Kgosi (King) Lebone II (the current King’s brother and predecessor), announced Vision 2020 – a progressive, ambitious, development plan that would address this new challenge. The current King, Kgosi Leruo Molotlegi, who took the throne in 2000, has taken this further still, in the form of Vision 2035, laying down grand plans for the growth and sustainability of the community and its economy.
But all of this determined development would not be possible without capital, and it is here that the Royal Bafokeng Nation and its principal investment arm, Royal Bafokeng Holdings (RBH), sets itself apart. RBH was established in 2006 to manage and grow the commercial assets of the RBN. It was created through a merger of Royal Bafokeng Resources (established in 2002) and Royal Bafokeng Finance (established in 2004). The RBN, through the Royal Bafokeng Nation Development Trust (RBNDT), is RBH’s sole shareholder.
RBH functions as a communitybased investment company whose primary investment aim is to generate the income required for the funding of sustainable projects. Income generated from RBH’s commercial interests is invested in infrastructural development, as well as in the members of the Nation itself. Over the past decade, more than R4 billion ($475 million) has been spent on roads, utilities, schools, clinics and other public amenities. This has benefited not only the Bafokeng, but other people living in the North West Province of South Africa, the area which the RBN calls home.
When asked about RBH’s success, Lucas Ndala, Acting CEO of RBH, says, “One of the key things has been leadership; strong leadership and strong governance. The model has always been to build the community into one of excellence, and to build for the future. It is intergenerational – what we do today should also benefit future generations. Everything that has come into place has made sure that the model is sustainable and continues to grow.”
The Royal Bafokeng Nation Has A Different Investment Philosophy
In accordance with the goal of creating a self-sustaining community, RBH holds a holistic and long-term view when it comes to investments, portfolio management and resource allocation. Because RBH exists solely for the benefit of the Nation, the commercial and social investment mandates and strategies are very important, and the views and opinions of the people are key in determining the manner in which the portfolio is managed. Significant holdings in the mining industry aside, RBH’s investment portfolio currently includes assets in the telecommunications, financial, manufacturing, services and infrastructure sectors. All the shares are held by the RBNDT, which also has social delivery entities: the Royal Bafokeng Administration, which serves as a municipality, providing utility and social services to the community; Royal Bafokeng Enterprise Development (RBED), which promotes local economic development; and the Royal Bafokeng Institute, which concentrates on education.
When asked about the current market value of assets, Ndala considers before answering that as of end June, it was R34 billion – R24 billion after debt. He seems satisfied with these figures, though he does say that their goal in the next five to 10 years is to have a portfolio in excess of R100 billion. And profit after tax? “If you consolidate everything, the current year generated a revenue of about R10 billion, with an operating profit of just over R4 billion. Profit last year was about R 3.1 billion,” he says.
When it comes to investment planning, the RBH executive team is fastidious, following a strategy designed to make capital returns, diversify the portfolio and maximise dividend flow to the RBN. Also crucial is the stated goal of decreasing dependence on platinum group metals as a primary source of wealth. Affirms Ndala, “The strategy of late has been more to diversify the portfolio, such as the acquisition of RMBH and RMIH.
Our strategy also includes growth for the future, and we’re focussed strongly on infrastructure and telecoms, as well as services/industrial, and bulk share investments. We’re also focussing on financial services, which straddle all of these areas because they allow for the funding of resources.”
As the intention is to build a portfolio that will consistently give the shareholders a steady return, Ndala says that the existing portfolio is currently under review. “Now that we have reached a certain size, some of the initial investments are now so small that the time and energy they take up doesn’t warrant keeping them. So we will release some of that capital and reinvest it elsewhere,” he says. “RBH is the revenue generator for the shareholder [Royal Bafokeng Nation], so a more balanced portfolio gives a more consistent return. If one sector is down, the other balances it out. We saw this recently with RMBH, where platinum went down and financial services went up.”
The team dedicates a considerable amount of time, effort and research to analysis, scrutinising the reasonable value of potential targets, and the long-term growth opportunities they hold. The philosophy is that it is preferable to pay a fair price for a wonderful business than a wonderful price for a fair business. They believe the higher compound return generated by the wonderful business will more than compensate for the initial discount on buying into a business that has an average growth rate.
At all times the company tries to position itself so to maximise access to relevant deal flow.
This affords them the greatest possible choice. Ultimately, RBH’s investment activities are opportunistic – they seek out undervalued asset classes, industries and companies, identifying areas of strategic importance, but being careful not to overpay on specific investments. The Nation’s investors take refuge in value, buying into businesses at prices that do not factor in high future earnings growth rates. As a general rule of thumb, they avoid buying assets that are trading on high P/E ratios. According to the executive team, “We try to invest in a contrarian manner – buying out-of-favour assets which are at the bottom of their profit cycles and are therefore most undervalued. Similarly, should we seek to sell non-core assets we would aim to do so when they are ‘hot’, near the top of their profit cycle and relatively overvalued.” What they don’t avoid is a belief in trends and cycles, as they have recognised the importance of cycles in economic growth, commodities, interest rates and other macro drivers on company profiles and share prices. “Timing cycles, however, is tricky. We would rather buy into businesses that we can hold through cycles. The terms of purchase can be further enhanced through securing BEE discounts, mispriced options on follow-on purchases and the judicious use of debt funding,” the executive team said.
The Importance of Partnerships
Critical to RBH’s many successes is their approach to partnership, and all stakeholders have a role to play in RBH’s drive to create value. Ndala says that while RBH is looking for its next investment opportunity, one has yet to be found. “Remember it must be in line with our strategy,” he explains. Currently, the group is trying to better understand African countries, and looking for partners on the continent. “We see ourselves as a Pan-African player,” he says, “and we want to invest more in the African continent. For us that would be a great achievement. Africa offers better returns than many opportunities off the continent.” When asked what challenges they’ve faced, Ndala says “access to good investments”. He also says there is a common misconception that RBH has “deep pockets”. Instead, he elaborates, the group is more conservative in its offers.